Nationwide predict house prices growth in 2008 to be zero:

• Economic tailwinds are turning into headwinds, and house price inflation is expected to drop from the current rate of 9.7% to 0% by this time next year
• A slower economy, stretched affordability, tighter credit conditions and lower buy-to-let demand will all take a bite out of house price inflation
• Interest rate cuts and tight supply will provide some support to price growth, but are unlikely to prevent a significant slowdown
• Scotland is forecast to have the strongest house price growth in 2008, while prices in Northern Ireland are forecast to fall somewhat from dizzying heights

Commenting on the forecast Fionnuala Earley, Nationwide's chief economist, said:
“House prices recorded another strong year in 2007, underpinned by significant economic momentum, ongoing housing shortages and strong buy-to-let demand. We forecast house price growth of 5-8% in December last year, and with two months left to go it looks like the middle to upper end of this range will be achieved. That being said, momentum is now fading, and a number of factors suggest that house price inflation will drop from its current rate of 9.7% to 0% by this time next year.

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The main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity. The supply-side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building. These shortages will provide some offsetting support to prices amid the weaker demand environment, particularly in the south of the UK."

Economic tailwinds turn into headwinds

“The strength of the economy was a key support to the housing market for most of 2007. A global economic boom allowed London to benefit from its position as a leading international financial centre, while the manufacturing sector shrugged off the strong pound and high raw material costs to record a relatively strong year. The buoyant economy proved supportive of buyer confidence and helped keep housing demand at high levels, particularly during the first half of the year.

“Yet, as we move into 2008, economic tailwinds are increasingly being replaced by headwinds. To begin with, the economy’s strength forced the Bank of England to increase base rates to a six-year high, which has been feeding into the pricing of mortgages and other types of credit. Further upward pressure on mortgage rates – particularly at the riskier end of the lending spectrum – has stemmed from the credit crunch that began in August, a result of large losses on investments in securities linked to US sub-prime mortgages. Petrol prices of £1 per litre are also squeezing disposable incomes and represent another dampening factor for the economy.

“As a result of these developments, we expect economic growth to fall below 2% next year, from over 3% in 2007. Such a slowdown would be comparable to the UK experience of 2005, but would still be a far cry from conditions seen in the early 1990s. Nonetheless, a slower economy will produce some loosening in the labour market, with a slight rise in unemployment and fairly subdued wage growth. As signalled in the November Inflation Report, this leaves room for the MPC to reduce interest

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